India - Powergrid System Development Project

A-V -s (i//- VA Document of The World Bank FOR OFFICIAL USE ONLY I.'iLI-''.5F Ih ' YI I 1 V DN 7 II ! i. (K H Report No. 11574-TN STAFF APPRAISAL REPORT INDIA POWERGRID SYSTEK DEVELOPMENT PROJECT MARCH 2, 1993 Energy Operations Division Country Department II South Asia itegion This document has a restricted distribution and may be used by eipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without Wodd Bank authorization.  CURRENCY EQUIVALENTS (as of March 2, 1993) Currency Unit = Rupee (Rs) Re 1.U0 Paise 100 Rs 33.0 US$1.00 Rs 1.00 US$0.03 MEASURES AND EQUIVALENTS 1 Kilometer (km) = 1,000 meters (t a 0.6214 miles (mi) 1 Meter (m) = 39.37 inches in) 1 Cubic Meter (m ) - 1.31 cubic yard (cu yd) = 35.35 cu. ft. 1 Ton (t) = 1,000 kilograms (kg) - 2,200 lbs 1 Kilovolt (kV) = 1,000 volts (V) 1 Kilovolt-ampere (kVA) = 1,000 volts-amperes (VA) 1 Megawatt (MW) = 1,000 kilowatts (kW) 1 million watts 1 Kilowatt-hour (kWh) 1,000 watt-hours 1 Megawatt-hour (MWh) = 1,000 kilowatts-hours 1 Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours ABBREVIATIONS AND ACRONYMS ADS Asian Development Bank CEA Central Electricity Authority 00I Government of India HVDC High Voltage Direct Currenm lCD International Competitive Bidding LCB Local Competitive Bidding LICB Limited International Competitive Bidding LRMC Long-run Marginal Cost LTIPS Long Term Issues in the Power Sector study MOP Ministry of Power NHPC National Hydroelectric Power Corporation NTPC National Thermal Power Corporation ODA Overseas Development Administration PFC Power Finance Corporation POWERGRID Power Grid Corporation of India REB Regional Electricity Board SEB State Electricity Board SCF Standard Conversion Factor The Act Electricity (Supply) Act of 1948 USAID United States Agency for International Development FISCAL YEAR April 1 - March 31  FOR OMCAL UE ONLY INDIA POWERGRID SYSTEM DEVE.,4PMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No*. Loan and Project Summary . . . . . . . . . . . . . . . . . . . . . . . . . iv I. SECTORAL CONTEXT . . . . . . . .. .... . * * * * *. * . * * * * * * 1 Overview . . . . . . . . . . . *. * * * * . . . . . . . . . . . . 1 Organization of the Power Sector * ... 2 Electricity Supply, Demand and Tariffs . . . . . . . . . . . . . . 3 GOI Strategy in the Power Sector ......... . .... 4 Past Bank Group Operations and Strategy in the Power Sector . . . . . 5 New Approach in the Power Sector . . . . . . ........ . . . 8 II. THE BORROWER POWER GRID CORPORATION OF IDDIA LIMITED . . . . .. . . 9 Present Operational Environment. . . . . . . . . . . . . . . . . . . 9 POWERGRID's Objectives and Scope of Operations . . . . . . . . . . . 10 POWERID's Institutional Development . ....................... . . . 11 Organization, Mmg t and Staff . . .................. 14 POVERGRID's Investmet Program . . . . . . . . . . . . . . . . . . . 14 Transmissior Regulation and Tariffs .9.9.9.9.9.9.9.9.9.9.9.9.9.9.9. 15 Bulk Power -4riffs . . . . . . . . . . . .*. * * 16 III. THE PROJECT . * . . * o . * * * . . . . * . 17 Project Objectives . . . . . . . . . . . . . . . . . . . . . . . . 17 Project Description . . . . . . . . . . . .9. . . . . . . . . . . . 18 Cost Estimates .. .9. . 9 * 9 . 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 . 19 This report was prepared by Messrs. Rari Nyman (Energy Economist), John Irving (Senior Power Engineer), Akbar Thawaja (Information Technology Specialist), and Tjaarda Stonm van Leeuwen (Senior Financial Analyst). The report was reviewed by Messrs. John Besant-Jones (Principal Economist, IENEP) and Olivier Koenig (Senior Economist, ASTEG). The report was endorsed by Mr. Heinz Vergin, Director, India Country Department, and Mr. Jean-Francois Bauer, Division Chief, Energy Operations Division, India Country Department. This document has a rtrctd distbution and may be used by mcipi:nts only in th perfomanco of their oMcia duties. Its contents may not otherwise be disclosed without Wodd Bank authori2ation.  Pase No. Project Financng . . . . . . . . . . . . . . . . . . . . . . . . .. 20 Project Management . . . . . . . . . . . . . . . . 21 Status of Project Preparation . . . . . . . . . . . . . . . . . . . 22 Project Schedule . . . . . . . . . *. . . . . . , *. . . * *. . .a2s Procuremt . . . . . . . . . . . . * . * . . * . . # . . . * a . * 23 Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Environmental Aspects . . . . . . * * . .. . . . .* # * * o . . .. . 25 Project Monitoring and Supervision . . . . . . .#. . . . . . . . . .26 IV. FINWCE * *99 9 9 9 9 9 9 9* 9 9 9 * 9 9 *9* 9 * 9 9 * 9 26 P0 6 IID - Past Financial Perfosn ce . e*,...*..* * 26 Accounting. Management Infornation and Auditing . . . . . . . . . . . 27 De-jure Transfer of Assets and Liabilities . . . . . . . . . . . . . 27 PO0MORID's Financial Position (March 31, 1992) . ... ... 28 Billing and Collection .....*.... .*......... ..25 Financing of POVERGRID's Investment Program . . . . . . . . . . . . . 30 Future linances . . . . . . . . . . . . . . . . . . . . . . . . . . 31 V. PROJECT JUSTIFICATION 9. o . . . . . . . . . . .. . .. . 32 Economic Analysis . . . . . . . . . .. . . . ..9.. . . . . . . .. 32 Improved Coordiuation of System Operations . . . . . . . . . . . . . 33 Project Risks . . . . . . . . . . . . . . .*. . . . . .9. . . . . . . 34 VI* AGREDINTS AND RECOEETION 35 Beco.w.ndation . . . . . . . . . . . 36  ANNEXES 1.1 PREVIOUS LOANS AND CREDITS TO IIAN POWER SECTOR 2.1 POWRGRID IN INTERNATIOIAL PERSPECTIVE 2.2 POWERGRID'. TRANSMSSION PROJECTS 2.3 POWREID's ORGANATION CHART 2.4 POWERGRID's INVESTSMET PROGRAM 3.1 DETAILED PROJECT DESSCRIPTION 3.2 TRANSFER OF TRANSMSSION ASSETS FROM NTPC AND NMPO TO POWIRID 3.3 INSTITUTIONAL DEVELOPMENT OF POWZRGRID - TERMS OF RZEMNCE 3.4 BULK POWER AND TRANSMISSION TARIFF AND TRANSMISSION REGULATION STUDIES - TERMS OF REEENCE OF ADD TECUNICiL ASSISTANCE 3.5 COORDINATION AND CONTROL SYSTEM PROJECTS - TERMS OF RZJRS 3.6 TRANSMISSION PLANNXNG - TEIMS OF REFERENCE 3.7 CENTRAL POWER AND RIEMAND TRANSMISSION PROJECTS 3.8 SYSTEM COORDINATION AND CONTROL - DETAILED COSTS VINDHYACHAL-DHULE TRANSMISSION LINES RAMAGUNDAN- YDERANAD TRANSMISSION LINES 3.9 PROJECT MANAGEMENT ORGANIZATION 3. 10 PROJECT IMPLEMENTATION SCHEDULS 3.11 PROCUREMENT ARRANGEMENTS AND PACKAGES 3.12 SCHEDULE OF DISBURSEMENTS 3.13 BANK SUPERVISION PLAN 4.1 POWERGRIDs BALANCE SHEET AND REGIONAL DISTRIMUTION OF ASSETS :4.2 POWERGRIDs INVESTMENT PROGRAM AND FINANCING S 4.3 POWERGRIDs PROJECTED FINANCIAL STATEMENTS 4.4 ASSUMPTIONS FOR THE FINANCIAL PROJECTIONS 5.1 ECONOMIC ANALYSIS 6.1 RELATED DOCUMENTS IN THE PROJECT FILE MAPS IBRD 24518 - FUNCTION MAP OF SOUTHERN REGION SYSTEK COORDINATION AND CONTROL FACILITIES IBRD 24519 - TRANSMISSION SYSTEM REINFORCEMENT  - iv - INDIA POWERGRID SYSTEM DEVELOPMENT PROJECT Loan and Project Summary Borrower: Power Grid Corporation of India (POWERGRID) Guarantors India, acting by its President Amounts US$350 million Terms: Repayable over 20 years, Including five years of grace, at the Bank's standard variable interest rate. POVERGRID would bear the foreign exchange and interest rate risks. Guarantee Feet The Government of India (0OI) would charge a guarantee fee of 12 p.a. on the outstanding amount of the Bank loan. Project Description: Part A of the project, Srstem Coordination and Control, provides fors (a) the implementation of a coordination and control system for the Southern region; and (b) the preparation of similar systems for the Eastern, Western and North-Eastern regions. Part B, Transmission System Reinforcement, provides for: (a) the strengthening of POWERGRID's transmission system in the Southern and Western regions; (b) the completion of transmission lines and substations under the Central Power Transmission Project (Ln. 2283-IN) and the Rihand Power Transmission Project (Ln. 2555-IN); (c) transmission planning support and preparation of POWERGRIDIs future transmission projects; and (d) the installation of tariff meters. Part Cs Technical Assistance helps implement India's reform program for power transmission and system operations and supports POVERGRIDa's institutional development. Benefits: The proposed project: (a) helps establish and develop POWERGRID as a transmission service company and grid operator; and (b) supports the implementation of modern system coordination and control facilities and reinforcement of India's transmission system. This will improve the efficiency of power system operations, reduce transmission system losses, encourage private investment in power generation and facilitate competition in power generation. POWERGRID's tariff and commercial policies ensure financial viability and adequate internal resource contribution to investment; its operations will help attract private investment in power development by providing transmission service to independent generators and their customers. As a result, India's power sector will be able to supply more power, at a lower cost and higher quality, to help meet the energy needs of the Indian economy, which is undertaking a far-reaching macroeconomic and structural adjustment program.  - v - lUikss The project does not face any particular technical risks in implementation or operation. It utilizes well proven technologies and, where needed, provides for consultant support and training to POlZRORID in their utilization. The economic viability of POVIRGUD' s investment program is insensitive to changes In key assumptions. This applies similarly to its financial viability; tariff allows POWERGRID to charge its customers in addition to investment costs also the cost of working capital, actual interest charges and a 001-prescribed return on equity. POWERGRID's main financial risk therefore relates to its ability to recover its charges from its clients. As long as it recovers, the level and structure of 4ie tariff will safeguard its financial position. Special attention has been paid during project processing to ensuring that POVURG ID develops adequate commercial arrangements to ensure satisfactory revenue recovery. While the foundation for POWERGRID tecoming a transmission utility and operator of power pools has been laid during project processing, the risk that the state electricity boards (SEns) will not participate in the power pools to coordinate their operations remains. To the extent they do not take advantage of the opportunities provided by POWVRGEID to reduce their operating and investment costs, the full potential benefits of POW =GRID's operations will not be realized. GOI's and POWERGID's success in pursuing the implementation of the recommendations of the bulk power tariff studies will be essential, as further tariff improvements beyond the two-part tariffs implemented during project processing will be required to provide the SEEs commercial incentives to coordinate their operations.  - vi - Estimated Cost: 8I Local Foreign Totsl -_----- (USS millon)------ A. System Coordination and Control 55 98 153 B. Transmission Reinforcement 146 189 335 C. Technical Assistance 2 5 7 TOTAL BASE COST 203 292 495 Physical Contingenciss 20 27 47 Price Contingencies 45 Sea s TOTAL CONTINGENCIES 65 65 130 TOTAL PROJECT COST 268 3S57 625 Interest During Construction (IDC) World Bank 68 68 Others 49 22 71 TOTAL IDC 49 90 13I TOTAL FINANCING REQUIRRD 317 447 764 Financing Plant Source Proposed Bank loan 55 295 350 46 Other borrowings 85 148 233 31 ADB grant - 1 1 na ODA grant - 3 3 a SEBs 24 - 24 3 POVERGRID 153 - 153 20 Total 317 447 764 100 Estlmated Bank Disbursements (US$ million) Bank Fiscal Year PY94 FY95 FY96 FY97 FY8 FY99 FY2000 Annual 51.5 50.0 127.3 72.0 27.9 16.7 4.6 Cumlative 51.5 101.5 228.8 300.8 328.7 345.3 350.0 Rate of Return: 222 a/ Including taxes and duties of about USS76.1 million equivalent.  INDIA POWERGRID SYSTEH DEVELOPMENT PROJECT STAFF APPRAISAL REPORT I. SECTORAL CONTEXT Overview 1.1 Power Situation and Challenge. Over the past decade, electricity consumption in India increased at an average annual rate of about 92, but with a per capita level of about 270 kVh per annum, electricity consumption remains among the lowest in the world. Despite progress In system expansion, power shortages persist and, in FY92, were equivalent to about 9Z of total energy and 18Z of peak capacity requirements. Demand is expected to continue to expand at an average growth rate of 8SZ per annum and massive investments in power supply continue to be required. As pointed out in a recent Bank study of the power sector&/, increased emphasis needs to placed on improving the efficiency of supply, consumption and pricing of electricity. Supply capacity expansion alone will not substantially improve the critical power demandl supply situation and is likely to be financially unsustainable. A maj3or challenge for the Government of India (GOI) in the power sector in the 1990s will thus be to strike a better balance between supply expansion and efficiency improvement. In the face of the current and medium-term budgetary constraints, GO funding of the sector's investment program is likely to be Insufficient; the state and central government-owned utilities will thus have to rely increasingly on their own internal resources as well as private investment. 1.2 Power Sector Reform. GO1 has recognized that the growth targets of its economic stabilization and liberalization program will be threatened as long as power supply continues to severely constrain industrial development and financial burden of the power sector on public sector finances is not contained. Major reforms are underway to help address the issues, complementing the long-standing programs to increase energy self-reliance, reduce oil dependence and meet rural energy needs. GOI's power sector reform program includes: (a) faced wiclh a growing power gap and diminishing public resources available for the sector, GOI has opened the power sector to private sector participation in generation; transmission and distribution, beyond the few successful licensee operations (in Bombay, Calcutta, Abmedabad and Surat). This is fully in line and consistent with GOI1's economic liberalization objectives, to tap the financial, technical and managerial capabilities of the private sector into areas previously reserved to the public sector; 11 Long Term Issues in the Power Sector (LTIPS), December 1991. The study was prepared in 1990-91, with financing from the Overseas Development Administration (ODA) of the United Kingdom and the United States Agency for International Development (USAID). It was formally discussed with Gol in February 1992.  - 2 - (b) GOI has started to promote reforms at the state l1,el in the state electricity boards (SEBs)* The Power Finance Corporation (PFC) was established to raise resources and lend only to utilities, which have undertaken to implement an Operational and Financial Action Plan (OFAP), endorsed by their state governments and aimed at improving the utilities" resource mobilization and operational efficiency; (c) 001 has adopted uew investment and commercial policies and electricity tariffs for Its main generating utility, the National Thermal Power Corporation (NTPC). They are designed to improve NTPC's operational and fin&>oial performance and help NTPC improve its revenue recovery while alec promoting reforms by SEBs; and (d) 001 established the Power Grid Corporation of India (POWIGRID) to: (a) improve the efficiency in power transmission and system operatW is, through an extensive restructuring of the transmission sector; and (b) complement its policy initiatives to encourage private generation and competition in power generation. 1.3 Bank Support. The Bank supports GOI's reform initiatives through a series of ongoing and proposed lending/technical assistance operations: (a) the Bank and IFC are working closely with GO0 to assist in the refinement and implementation of GOI's private power policy. Under the Second Maharashtra Power Project (Ln. 3498-IN, approved in June 1992) the Bank is also helping Maharashtra develop its private power policy and regulatory framework and to contract with private developers for major power generation projects. These activities are partly financed by two grants from the Japan Grant Facility; (the Bank is also preparing a technical assistance project for private power development, para 1.12); (b) the Power Utilities Efficiency Improvement Project (Ln. 3436-IN, approved in January 1992) supports GOI's efforts to develop PFC into a viable and effective instrument for promoting improvements In the stattt power sector; (c) the first of a planned series of NTPC leading operations is in advanced stage of preparation, to support the implementation of NTPC's new investment and commercial policies; and (d) the proposed project supports the implementation of